Life Insurance: The Basics

What is the one guarantee in life? Life Insurance: The Basics What is the one guarantee in life? You buy health insurance in case you get sick You buy automobile insurance in case you have an accident You buy homeowners insurance in case your property gets damaged You don’t buy life insurance to plan for your death

Life Insurance: The Basics Life Insurance is to protect the people who depend on you and would suffer a financial loss when you die A beneficiary is the person or legal entity, such as a charity, designated to receive the death benefit The death benefit is the sum paid to the beneficiary by the insurance company

Life Insurance: The Basics Usually people buy life insurance to protect their children, a surviving spouse, a disabled relative, or elderly parents It ensures that the dependent family members will be able to afford and maintain their lifestyle or receive the care they had before the death

Life Insurance: The Basics Reasons to Buy Life Insurance To provide immediate cash to pay for a funeral, any other costs arising from the death, or pressing debts To provide funds that are income tax-free To pay off a mortgage or other loans To provide housekeeping and child care services so that the surviving spouse can enter the workforce To provide the surviving spouse sufficient funds to stay at home or reduce work hours To provide dependents with an emergency fund

How Life Insurance Works A legally binding contract between an insurance company (insurer) and an individual (insured) In exchange for payment of premiums, the insurer agrees to pay a specified death benefit The premiums collected from all policy holders are placed in an insurance pool The Insurance Company can invest the money in the pool but must have enough on hand to pay out a large number of claims

Life Insurance: The Basics How insurers reduce risk Insurance companies want to enroll low-risk people If a person dies shortly after they are insured, the company has not had enough time to collect enough premiums to cover the loss

Life Insurance: The Basics Underwriting Life Insurance Underwriting is the process of assessing applicants to determine whether they are good risks An underwriter’s job is to minimize the risk the company takes Factors in underwriting: Present health Medical history Family medical history Lifestyle Occupation

Life Insurance: The Basics Mortality Tables Sophisticated statistical averages of how long a person of a certain age, gender, ethnic background and so on can be expected to live Tables also consider your health, medical history, occupation Premium Class Insureds are placed into classes based on results from underwriting The better the class the lower the premiums

Life Insurance: Basic Policy Types Two Basic Types Term Insurance Permanent Insurance

Life Insurance: Basic Policy Types Term Insurance Simplest Usually most inexpensive A policy that is limited to a specific length of time, or term Does not accumulate cash value Usually term is 1,5,10,15,20,25,or 30 years

Permanent Life Insurance Life Insurance: Basic Policy Types Permanent Life Insurance Covers the insured for a lifetime or until age 100 If you live to 100 insurer pays individual the death benefit Three types of Permanent Insurance: Whole life Universal life Variable life

Permanent Life Insurance Life Insurance: Basic Policy Types Permanent Life Insurance Cash Value Cash reserves accumulate in the policy You can take a loan out on the policy You can cash in your policy Dividends The proportion of a company’s profit that it pays to its policyholders

Life Insurance: The Basics How much life insurance should a person have? Factors: Number of dependents Ages and needs of dependents Balance on mortgage or monthly rent payments Balance of loans Health insurance Tuition Basic necessities

Life Insurance: The Basics Where do you buy life insurance? Some employers offer it as a benefit Insurance companies sell insurance through experienced agents You can buy life insurance through the internet